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Monday, 10 October 2011

The Dutch banks are ‘solid as a rock’, according to supervisors and pundits. Are they? Or is it just value-free propaganda?

There are two kinds of news in the world: real news and propaganda.The following news message in the Dutch newspaper De Telegraaf ( seems to belong to the second category (no link available):

Dutch Banks are Solid as a rock

While banks in the European countries are under heavy pressure, there is no need for The Netherlands to have concerns on the financial position of the Dutch banks. According to supervisors and pundits, the financial industry in The Netherlands is ‘solid as a rock’.

Yesterday, the news was published that rating agency Moody’s downgraded 12 British banks and that the Belgian government has no other choice than to store the troubled Dexia bank under the wings of the Belgian taxpayers.

While the news printed red and bold might seem comforting for worried savers and investors, inquiring minds know that these kinds of remarks are virtually worthless without the proper data to prove it. It’s like your local butcher shop assuring you that their tests proved that they had the best meat of all the butcher shops around.

Therefore I went to the site of the Dutch national bank ‘De Nederlandsche Bank’ ( to dig up some data on the current financial positions of the large Dutch banks to check the reality base of the aforementioned statement.

Unfortunately, all financial data of DNB is anonymous; this makes it impossible to distinguish between individual banks. However, it is useful to sketch a big picture of the financial situation of the Dutch banks. And it can even help to debunk some stories on banking behavior during the credit crisis.

Net exposure Dutch banks to foreign countries (in € mln). Click to enlarge
I marked the net exposure of Dutch banks to the PIIGS-countries (except Portugal, due to the relative small amount of the exposure), Belgium and France:
·    There is indeed ‘little’ exposure to Greece, but probably 50-60% of this amount should be written off.
·    There is substantial exposure to Belgium and Italy (€20 bln combined) and 
o    especially Italy is still targeted by the financial markets.

·      There is massive exposure to Ireland, Spain and France (€97 bln combined).
o    Especially Spain and Ireland are still in financial trouble. This puts €50bln under jeopardy;
France could soon follow if the country’s attempts to save its banks (SocGen, BNP Paribas and CredAgri ) go awry. This puts another €46 bln under jeopardy.

The following chart shows private loans that Dutch banks have outstanding in The Netherlands: 
Private loans of Dutch banks within The Netherlands. Click to enlarge
  • After a small dip in the amount of outstanding mortgages from June, 2010 until March, 2011, the level of mortgages rebounded to the highest level ever and is now currently at €385 bln.
  • The average residual debt that remained on houses with a National Mortgage Guarantee (NHG) after a forced sale was €35,500.
  • If we set the average value for a house with NHG on €250,000 (this will be about right), it means that the mortgage is in average 14% higher than the true value of the house (i.e. the execution value)
  • If we execute this 14% calculation on the whole Dutch mortgage market, it means that banks have €46 bln in uncovered value in their mortgages. 
    • And this is a very optimistic calculation, as the more expensive houses without NHG have probably more uncovered value after a forced sale. 
    • And of course, all Dutch families won’t stop paying their mortgages. But if 5% of the Dutch people do so in due course, this might be a possible loss of €2.3 bln. 
  • The €47 bln in uncollaterized loans are also a risk if the economic circumstances in The Netherlands deteriorate. 
There is something remarkable with this chart; after the start of the credit crisis, there existed the myth that Dutch banks didn’t want to lend anymore.

The previous chart shows that this is absolutely not true: the mortgage market is currently higher than ever and consumer credit is also higher than ever. 

This myth is therefore ‘busted’ with this chart and also with the following chart, showing corporate loans in The Netherlands

Corporate loans of Dutch banks within The Netherlands. Click to enlarge
The chart with corporate loans outside The Netherlands (i.e. The Euro zone) is even more enigmatic: 

Corporate loans of Dutch banks outside The Netherlands. Click to enlarge

  • In the first months of the American credit crisis (early 2008) loans to foreign banks soared until May. Afterwards the level dropped somewhat with some ups and downs, but it is still well beyond the January 2008 level.
  • The loans to foreign private companies absolutely soared since December 2006 and in spite of the trough during 2010, the loans are back at record levels.
  • Also with these loans to foreign private companies, the quality of the credit depends on the quality of the collateral. But also here there is a risk of losses to the amount of €1.5 bln, if 3% of the private companies would default. 

What is the conclusion of these DNB data on domestic and foreign bank loans and the net exposure to other countries in the Euro-zone? 

The following items are notable on this chart:
·     The level of corporate loans to private companies is currently higher than ever. The myth that banks didn’t lend anymore to companies is effectively debunked.
·     It seems that the story that banks don’t lend to eachother anymore is not true for The Netherlands.
·     It becomes clear that banks have more than €300 bln in loans to private company. The quality of these loans depends on the quality of the collateral handed over by these companies.
o    Are these loans risk-free? Far from; if the economy deteriorates, it can be expected that a percentage of these corporate loans to private companies won’t be paid back. When this percentage would be 3%, the banks would be on the hook for € 9 bln.

First, the myth that banks didn't lend anymore after the credit crisis started was a myth. It is debunked by the facts.

Second: There is no immediate need for worries on the Dutch banks, but the statement that Dutch banks are solid as a rock is only true as long as nothing goes really wrong in the mortgage market, the corporate loans market and with the exposure to other countries in the Euro-zone. But if things start to go wrong here and there, the rock-solid status might quickly turn into a sand castle.

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